Joe Cahill On Business

State removes 'kick me' sign with pension bill

The pension deal in Springfield is the best news Illinois business has heard in a while.

“Best,” of course, is a relative term. A pension-reform law patched together with compromises and hopeful assumptions won't solve all the problems politicians have created for Illinois businesses over the past several decades. Companies still face heavy tax burdens, cumbersome regulations and education systems that don't teach the skills they need.

Still, the law is a step in the right direction and a potential momentum-shifter for business. First, and perhaps most important, it removes an enormous source of uncertainty that made companies hesitate to invest here. Until lawmakers agreed on a plan to finance $100 billion in unfunded state-employee pension liabilities, businesses worried, understandably, that they'd be stuck with the tab through additional tax hikes.

Second, the deal counters perceptions that Illinois government is completely dysfunctional. Gov. Pat Quinn and legislative bosses showed they really can work together to do something about a massive fiscal crisis.

If the deal survives constitutional scrutiny and actuarial reality—two big ifs—it will provide some reassurance to Illinois companies and undercut the arguments of rival states trying to poach our businesses. Companies already here may feel more comfortable about staying and expanding, while those that have shied away may give us another look.

Dispelling the pension gloom allows Illinois' strengths to shine through more clearly. We'll never be the lowest-cost business location, but our transportation assets, diverse economy, deep talent pool and vibrant culture offset that disadvantage for many companies.

But Illinois won't maximize the return on those assets unless politicians knock down other obstacles to investment and job creation. High on the list are elevated corporate income tax rates that are supposed to expire in 2015. Unfortunately, the pension deal makes an extension of the higher rates appear more likely, because the state now must pump more cash into pension plans. A better approach would be to let income tax rates fall and bolster revenue by extending sales taxes to services, as other states have done.

Lawmakers could show they're serious about improving business conditions by reviewing economic regulations and weeding out unnecessarily burdensome rules that drive up costs. For example, workers' compensation costs in Illinois remain too high even after modest changes in 2011, as my colleague Paul Merrion recently reported.

Education is where government can do the most for business. Companies around the world are struggling to find the talent they need to compete in a high-tech, 21st-century economy. Schools in Illinois, like those in many other states, haven't done a very good job of synching curriculums with employers' needs. Any state that becomes known for producing highly skilled workers will have a tremendous edge in the battle for investment and well-paid jobs.

Nowadays “capital follows talent,” says Paul O'Connor of Skidmore Owings & Merrill LLP, who used to run World Business Chicago, the agency responsible for recruiting corporations to the city. In conversations with companies considering Chicago, he says, “the first question was always workforce development.”

Ramping up job-relevant education requires investment. It's hard to increase, or even maintain, education funding when pensions are claiming an ever-larger share of state and municipal budgets. Backers of the pension legislation say it will preserve more dollars for schools.

I hope they're right. I also hope they follow up on pension reform with more action to improve business conditions in Illinois.